Pandemic hangs over UAE banks’ bottom lines – but it could be worse
A loan deferral program and strong central bank support have bolstered the earnings of the UAE’s major banks, although net interest margins have declined and write-downs will likely increase as the repayment holidays end.
In October, the IMF revised its economic forecast for the UAE, forecasting real GDP to contract by 6.6% in 2020, from its earlier estimate of a 3.5% decline. Trading conditions also deteriorated despite the easing of foreclosure restrictions, with the IHS Markit UAE purchasing managers index slipping to 49.5 in October from 51.0 in September.
These problems were reflected in the banks’ results in the third quarter. First Abu Dhabi Bank PJSC, or FAB, the UAE’s largest bank and the second-largest bank in the Middle East and Africa by assets, reported a 19.3% drop in quarterly profit to 2 , 51 billion dirhams, according to S&P Global Market Intelligence. The data.
Third quarter earnings of Emirates NBD Bank PJSC, or ENBD, and Abu Dhabi Commercial Bank PJSC, or ADCB, the second and third largest banks in the United Arab Emirates, fell 68.8% and 3.5%, respectively. The results of the previous year of ENBD were inflated by a one-time gain of 2.3 billion dirhams.
The quarterly operating income of the 10 largest banks in the United Arab Emirates amounted to 19.9 billion dirhams, against 22.0 billion dirhams the previous year, according to a report by consultants Alvarez & Marsal.
“The results were reasonably in line with market expectations,” said Asad Ahmed, managing director of Alvarez & Marsal and head of financial services in the Middle East.
Help from the government
However, the profit declines would have been greater without the Central Bank of the United Arab Emirates’ Economic stimulus program of 256 billion dirhams. As part of the central bank’s Targeted Economic Support Program, or TESS, banks have been instructed to allow borrowers to defer repayment of interest and principal owed on loans.
Under the TESS, banks could obtain interest-free funds from the central bank. As of September 30, Emirates NBD was using 6 billion dirhams of this free funding. The regulator also halved the minimum cash reserve ratio of banks to 7% and relaxed other regulations.
“The main effect is that there has been continuous liquidity in the system, which is extremely important to come out of a crisis like this,” Ahmed said. “TESS has been extremely helpful to the economy of the UAE. “
In 2020, ENBD clients deferred 6.6 billion dirhams in loan repayments until September 30. Of this amount, 5.2 billion dirhams concerned the corporate bank. In total, carry-overs relate to loans totaling 49.1 billion dirhams.
During a call to an analyst, ENBD CEO Shayne Nelson revealed that his bank had allowed around 100,000 customers to defer repayments.
“So far there has been a modest deterioration in credit quality, but it will be several more quarters before the true credit picture becomes evident,” said Nelson.
The ADCB delayed 7.7 billion dirhams in loan repayments on loans of 66.8 billion dirhams. The FAB deferred 7.5 billion loan repayments on loans totaling 48.6 billion dirhams, or 12% of its total loan portfolio.
Almost 40% of FAB loans go to government-linked entities, with an additional 6% to short-term commercial loans.
“[Our] loans and advances are for very safe assets and I think that [us] well compared to our competitors in terms of cost of risk, ”FAB CEO James Burdett said on a conference call with an analyst, predicting that government-backed companies would drive the UAE’s economic rebound Arab Emirates and that his bank would benefit disproportionately. Of ENBD loans and receivables, 39% goes to government entities in Dubai.
The large exposure of FAB and ENBD to state-linked institutions is a strength, said Shabbir Malik, banking analyst at EFG Hermes in Dubai, because “sovereigns tend to have stronger balance sheets and better access to finance. debt capital markets relative to [small and medium-sized enterprises] or companies. “
Mixed credit quality
Yet impairments were still skyrocketing. The nine-month net write-downs of the ENBD more than doubled to 6.1 billion dirhams, while 12% of its gross loans are now in phase 2 or 3. Since the end of 2019, the bank’s expected credit losses increased from 4.8 billion dirhams to 34 billion dirhams. .
Nine-month FOB write-downs increased 71% to 2.3 billion dirhams. The ADCB more than doubled to 3.1 billion dirhams.
“Banks such as Emirates NBD and ADCB have taken much larger provisions as a percentage of their operating income than FAB,” Ahmed said. This does not necessarily mean that FAB took insufficient portfolios, he said, but rather reflects the different loan portfolios of the banks. Part of the variation in banks’ profits this year is due to their funding levels, Ahmed said.
“Credit quality and funding trends were mixed,” said Malik. “Some smaller banks more focused on the SME sector reported higher provisions, but the provisioning levels of FAB and ENBD were decent and nothing too alarming as they are more geared towards lending to government entities and large companies. . “
Non-performing loan ratios are also increasing. ENBD’s third-quarter NPL ratio was 6.42%, down from 5.13% a year earlier, according to data from S&P Global Market Intelligence. ADCB’s NPL ratio increased to 7.56% from 2.61% year-on-year, while FAB posted an NPL ratio of 4.04% from 3.18% in the third quarter.
“Some people and businesses with cash flow issues will be able to meet their loan obligations, which should mean that non-performing loans and provisioning will not be as high as they would have been without them. [deferment] measures, ”said Malik.
“I expect NPLs and provisions to be high over the next two to three quarters as these deferral programs come to an end. As customers return to the normal payment cycle, we will have a better picture. “
ENBD’s third quarter net interest margin declined as lower loan yields offset lower deposit costs. Both FAB and ADCB posted declines in NIM year over year and quarter over quarter.
“We think NIM has bottomed out,” said Burdett of FAB. “We expect the cost of customer deposits to continue to decline.”
Analysts remain more cautious. “Net interest margins will continue to be under pressure,” Ahmed said.
As of December 7, 1 US dollar was equivalent to 3.67 UAE dirhams.